Article2002

Real Options—An Introduction and an Application to R&D Valuation

37 citations0/0 files storedThe Engineering Economist

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Capital Investment and Risk Analysis Stochastic processes and financial applications Financial Reporting and Valuation Research

Abstract

In this short paper, we summarize the real options approach and show how it can be used to introduce flexibility into the capital budgeting process. We then go on to show an application of real option evaluation to research and development valuation in the pharmaceutical industry. Our calculations and illustrations are in Excel and can be easily replicated.

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References

1973The Pricing of Options and Corporate Liabilities 1979Option pricing: A simplified approach 1996Real Options: Managerial Flexibility and Strategy in Resource Allocation 1996Real options: Managerial flexibility and strategy in resource allocation 2001Real Options: A Practitioner's Guide 2000Real-Options Valuation for a Biotechnology Company

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2007Valuing technology investments: use real options thinking but forget real options valuation

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